Cisco, the world’s largest maker of computer-networking
equipment, is using a combination of cash and retention-based
incentives to pay for the acquisition, the San Jose, California-based company said yesterday in a statement.

Chief Executive Officer John Chambers is seeking to
capitalize on the boom in demand for smartphones and tablets in
the workplace by snapping up a company that helps businesses
manage security and wireless access points via the Internet. The
deal is aimed at broadening the customer base as Cisco cuts
costs, shuts underperforming divisions and trims prices to fend
off rivals such as Hewlett-Packard Co. and Juniper Networks Inc.

“The valuation reflects that Wi-Fi, as a market, has very
compelling growth prospects ahead,” said Erik Suppiger, an
analyst at JMP Securities LLC in San Francisco who rates Cisco
market perform.

Cisco shares rose 1.7 percent $18.30 at the close in New
York. The stock is little changed in the past year.

San Francisco-based Meraki expects about $100 million in
bookings this year, and its employee base has ballooned to 330
from 120, Meraki CEO Sanjit Biswas wrote in a letter to
employees discussing the deal.

Cisco’s Approach

Cisco approached Meraki with the offer several weeks ago
with the pitch of extending the company’s reach with worldwide
distribution through Cisco’s sales apparatus. Cisco was
attracted by Meraki’s technology and financials, Biswas wrote.

Meraki will allow Cisco to expand in software markets that
have high profit margins and recurring revenue, Hilton Romanski,
vice president of business development for Cisco, said on a
conference call today with analysts. He declined to specify how
much of Meraki’s revenue is recurring.

“This is a very attractive combination of a high-margin,
high-growth software business,” he said.

Entering businesses with recurring revenue is important for
Cisco because 80 percent of the company’s sales every quarter
now come from new business, Frank Calderoni, Cisco’s chief
financial officer, has said.

Software, Services

Cisco has been shifting to focus more on software and
services, areas that are more profitable and with more
predictable revenue than sales of networking hardware. Cisco
intends to acquire companies specializing in those markets and
make them a bigger part of Cisco’s business, Chambers said on
the company’s latest earnings call, on Nov. 13.

The Meraki acquisition is an acknowledgment of the success
that companies such as International Business Machines Corp. and
Oracle Corp. have had by focusing on software and services. It
also signals Cisco is changing its traditional approach of
selling primarily equipment while letting partners perform many
of the surrounding services.

Meraki has offices in New York, London and Mexico and was
formed in 2006 by doctoral candidates from Massachusetts
Institute of Technology. Its backers include Google Inc. and
venture capital firm Sequoia Capital. Cisco expects the deal to
close in the second quarter of next year.

Sequoia Capital

Google was one of Meraki’s first customers, buying 1,000
routers and investing in the company in its early days,
attracted by the convenience of Meraki’s technologies in
managing networks, Doug Leone, a partner at Sequoia Capital,
wrote in a blog post today.

“Before Meraki if you got a call at 1 a.m. you’d have to
go into the office, access a control panel and fix the issue
yourself, or even travel to the location of the problem,” Leone
wrote. “With the webapp, network admins can log on via their
browser and get a centralized view of all their deployments,
right down to the device level.”

Google spokeswoman Katelin Todhunter-Gerberg declined to
comment.

Cisco, which had planned to announce the acquisition later
today, inadvertently posted a blog about it yesterday, according
to Karen Tillman, a spokeswoman for the company.

The deal comes as the computer-networking industry is
undergoing a shift toward software that eliminates the need for
some expensive types of equipment and gives administrators more
remote control over their networks. Established rivals and
startups have been putting pressure on Cisco’s profit margins,
forcing the company to undergo a restructuring.

Chambers has cut 7,800 jobs over the past year and a half,
closed businesses such as the Flip video-camera unit and
eliminated bureaucratic bottlenecks in a bid to speed decision-making and focus Cisco’s resources on the company’s key
networking businesses.